WESTERN FUELS ASSOCIATION, INC., AND BASIN ELECTRIC POWER COOPERATIVE V. BNSF RAILWAY COMPANY

Decision Type: &nbsp

Decision

Deciding Body: &nbsp

Entire Board

Decision Summary

Decision Notes: &nbsp

DECISION FOUND THAT BNSF RAILWAY COMPANY HAS MARKET DOMINANCE OVER THE TRANSPORTATION AT ISSUE AND THAT THE CHALLENGED RATES ARE UNREASONABLY HIGH. MAXIMUM REASONABLE RATES ARE PRESCRIBED AND REPARATIONS ARE ORDERED IN THIS PROCEEDING.

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Full Text of Decision

*****

39709SERVICE DATE – LATE RELEASE FEBRUARY 18,
2009

EB

This decision will be printed in the bound volumes of

the STB printed reports at a later date.

SURFACE TRANSPORTATION BOARD

DECISION

STB Docket No. 42088

WESTERN FUELS
ASSOCIATION, INC., AND

BASIN ELECTRIC POWER
COOPERATIVE

v.

BNSF RAILWAY COMPANY

Decided:February 17, 2009

The
Board finds that the defendant railroad has market dominance over the
transportation at issue and that the challenged rates are unreasonably
high.Maximum reasonable rates are
prescribed and reparations are ordered.

This case involves a rate dispute between Western Fuels
Association, Inc. and Basin Electric Power Cooperative, Inc. (collectively, WFA),
and BNSF Railway Company (BNSF).The
dispute is over the reasonableness of the rates BNSF charges to WFA for hauling
8 million tons of coal each year from mines in the Powder River Basin (PRB) in Wyoming to WFA’s Laramie River Station plant (LRS) at Moba Junction, WY.Because the rate is a common carriage rate
and the LRS plant is captive to BNSF, the reasonableness of the rate is subject
to our jurisdiction.

In its first attempt, WFA failed to show the challenged rates
to be unreasonable under our stand-alone cost (SAC) test.But WFA had designed its SAC presentation
under one set of rules, only to have those rules changed during the course of
the proceeding.SeeMajor
Issues in Rail Rate Cases, STB Ex Parte 657 (Sub-No. 1) (STB served Oct.
30, 2006), aff’d sub nom.BNSF v. STB, 526 F.3d 770 (D.C. Cir. 2008) (Major Issues).We recognized that the change in revenue
allocation procedure could have affected the optimal size and configuration of
the stand-alone railroad (SARR) designed by WFA.Therefore, in our decision in the proceeding
served on September 10, 2007 (Sept. 2007 Decision), we afforded WFA
the opportunity to redesign the SARR to address the new revenue allocation
procedure and to submit supplemental evidence based on that redesign.

In this second attempt, WFA has succeeded in making its case.Although the challenged rates are among the
lowest transportation rates any utility pays to receive PRB coal, WFA has shown
that its rates far exceed the level BNSF needs to charge to earn a reasonable
return on the full replacement cost of the facilities used to serve WFA,
because the Laramie River Station plant is located so close to the PRB.As such, it is now clear that BNSF has been
forcing WFA to cross-subsidize other parts of BNSF’s broader rail network that
WFA does not use.This is
prohibited.So although the challenged
rates appeared on their face to be commercially reasonable, they exceed by a
wide margin the level BNSF is permitted to charge under the SAC test.

Accordingly, we will order BNSF to pay reparations to WFA
(with interest) for shipments dating back to the fourth quarter of 2004, and we
will prescribe the maximum lawful rate that BNSF can charge until 2024.The maximum lawful rate is expressed as a
revenue-to-variable cost ratio.Although
it varies from year-to-year, the maximum lawful rate BNSF may charge in 2009 is
roughly 240% of its variable costs, which translates to a roughly 60% reduction
in the transportation rate.

This amounts to the single largest reduction in rail rates
ever ordered by this agency.Although the
record does not provide the data needed to calculate precisely the total amount
of reparations due to WFA, we estimate that reparations are roughly $28 million
per year.We further estimate that the
total relief WFA will obtain as a result of this order – including both
reparations and the lower prescribed rate through 2024 – will approximate $345 million
(in current dollars).

Following our standard practice, the parties are to
calculate the total amount of reparations and interest due, in accordance with
this decision.If they cannot agree, the
parties should bring the dispute to our attention for prompt resolution.

As an
initial matter, BNSF maintains that WFA did not comply with the limited scope
of reopening and, therefore, this proceeding should be terminated.BNSF argues that the reopening of the record was
limited to only those adjustments to the existing SAC case required because of
the new method for allocating revenue from cross-over traffic.To that end, BNSF maintains that it is
unnecessary, and indeed inconsistent with the purpose of the limited reopening
of the record, to allow WFA to submit an essentially new SARR, including new
facilities and rerouted traffic.BNSF
argues that the new revenue allocation procedure did not create a new incentive
to include rerouted traffic, so WFA should not be allowed to modify its SAC
evidence to rely on rerouted traffic now.

We
disagree.In the Sept. 2007
Decision, we stated that the change to an average total cost (ATC) method
of allocating revenue from cross-over traffic[1]
would affect the basic design of a SAC case.[2]The decision acknowledged that WFA might wish
to change its traffic group and resulting design of its SARR.Thus, WFA was allowed to rework its SAC
presentation, so long as the modifications were based on evidence already in
the administrative record, including the discovery record.[3]

WFA’s revisions to the SARR complied with our instructions. The shipper has the right to specify the traffic group and, here, WFA properly
changed the traffic group and configuration of the SARR because of the new
revenue allocation procedure.Whether
the rerouted traffic and new geographic scope are reasonable will be determined
by our rules.We will therefore deny BNSF’s motion to
dismiss.

Our general
rules
of practice limit the permissible scope of rebuttal statements “to issues
raised in the reply statements to which they are direct­ed.”49 CFR 1112.6.­­­Thus, as the Board explained in Duke/NS,[4] in
rail rate cases the shipper may use its rebuttal presentation either to
demonstrate that its opening evidence was feasible and supported, to adopt the
railroad’s evidence, or in certain circumstances to refine its opening
evidence.Where the railroad has
identified flaws in the shipper’s evidence but has not provided evidence that
can be used in the Board’s SAC analysis, or where the shipper shows that the
railroad’s reply evidence is itself unsupported, infeasible or unrealistic, the
shipper may supply corrective evidence in its rebuttal.SeeGeneral Procedures for
Presenting Evidence in Stand-Alone Cost Rate Cases, 5 S.T.B. 441, 445-46
(2001).

Here there is a dispute over whether WFA exceeded the
permissible scope of rebuttal with regard to substituting culverts for certain
bridges in the Orin Yard.On opening,
WFA relied on BNSF’s bridge charts when deciding to use culverts in the yard.On reply, BNSF corrected an error in the
bridge inventory list, which BNSF asserts would make culverts inappropriate
because they would not provide for sufficient drainage.On rebuttal, WFA defended the use of culverts
with a study relying on a Drainage Area Map.

BNSF filed a motion to strike the rebuttal evidence.It argued that WFA was attempting to justify
its substitution of culverts, for the first time on rebuttal, by using the
Drainage Area Map.BNSF argues that WFA
did not support its use of culverts in its case-in-chief and therefore the
Board should assume that, where the SARR’s yard traverses drainages now crossed
by bridges, the SARR should construct bridges.BNSF asserts that presenting this evidence on rebuttal deprives it of a
meaningful opportunity to respond and, had WFA presented this evidence on
opening BNSF would have submitted evidence in its reply to show that one of the
culverts involved had a too narrow entry.WFA defended its rebuttal evidence, arguing that the evidence on the use
of culverts instead of bridges in the yard was permissible rebuttal because it
responded to an issue raised by the parties in a prior filing.

Applying the above evidentiary standards, we find that WFA’s
evidence on drainage and its reliance on the Drainage Area Map was permissible
rebuttal to demonstrate the feasibility and accuracy of its opening evidence in
light of BNSF’s reply evidence.In this
case, WFA did not raise a new issue; the feasibility of culverts was addressed
in WFA’s opening evidence.WFA’s additional
evidence in rebuttal on drainage was in direct response to BNSF’s argument that
culverts were inappropriate.WFA used
its rebuttal to respond to the evidence BNSF submitted on reply by showing that
its opening use of culverts remained feasible.Therefore, we will deny
BNSF’s motion to strike.

In Major Issues, we changed the SAC test in two ways
that are significant here.First, we
created a new revenue method to allocate revenue from cross-over traffic,
called the Average Total Cost (ATC) method.Second, we created a new rate prescription method to allocate the SAC
costs among the traffic group, called the Maximum Markup Method (MMM).Both changes were affirmed by the reviewing
court.On a less significant issue, but
of relevance here, we also concluded that we would allow a 20-year SAC analysis
for this pending case, notwithstanding our decision to move to a 10-year analysis
period for future SAC cases.

BNSF now urges us to depart from Major Issues.It asks that we not apply the ATC method to
allocate the revenue from rerouted cross-over traffic.[5]It also advocates an alternative to MMM that
would allocate more SAC costs to short-haul traffic such as the issue movement.[6]Finally, it argues that, if we prescribe a
rate here, the prescription should be limited to 10 years, notwithstanding that
in Major Issues we stated that the rate analysis for this pending case
would be 20 years.

BNSF may not collaterally attack the new procedures adopted
in Major Issues in this case.Those changes were the product of an elaborate rulemaking with public
comment from numerous interested parties.BNSF had a full opportunity to participate in that rulemaking, and to
challenge those aspects of the new rules in court.It would defeat the purpose of that
rulemaking if parties were permitted to advocate for different rules in
individual rate cases.

Accordingly, we will treat BNSF’s challenges as a request to
reopen and reconsider the policies and rules adopted in Major Issues.As such, BNSF must demonstrate that
reconsideration is warranted because of “material error, new evidence, or
substantially changed circumstances.”49
U.S.C. 722(c).If a change is warranted,
we will either address the matter within the context of that adjudication or,
if the advocated change is substantial, we will hold the case in abeyance and
seek broader public input.

Here, however, neither step is warranted.BNSF’s evidence amounts to a charge that the
rules adopted in Major Issues constituted material error, as illustrated
in their application in this case.[7]For the reasons discussed below, we find no
merit to BNSF’s claims that the rules adopted in Major Issues are not
working as intended.Accordingly, we
will use ATC to allocate revenue from all cross-over traffic, we will use MMM
to set the rate prescriptions, and the rate prescriptions here will extend out
to the full 20 years of the SAC analysis period.

In its supplemental evidence, WFA changed the traffic group
of the SARR by dropping traffic with low markups over variable costs and
replacing that traffic with rerouted traffic with higher markups.BNSF objects, claiming this swapping of
traffic is done solely to manipulate the rate prescription approach adopted in Major
Issues.To remedy this perceived wrongdoing,
BNSF advocates a large adjustment to the revenues from this rerouted cross-over
traffic.Rather than using the Average
Total Cost approach adopted in Major Issues, BNSF would adjust the
revenue from the new rerouted cross‑over traffic to produce the same
average revenue-to-variable cost (R/VC) ratio as the traffic WFA excluded from
the traffic group.

We reject BNSF’s
arguments and adjustment.The point of
this supplemental round of evidence is to offer WFA an opportunity to modify
its traffic group and better tailor its case to the new ATC revenue allocation
method.WFA therefore properly, as
expected, replaced marginal cross-over traffic with more profitable (rerouted)
cross-over traffic.BNSF has shown no
material error in the application of ATC to that traffic, other than the
perceived injustice of our having permitted WFA to change the traffic group in
the first place.We will not first
encourage WFA to modify the traffic group to take advantage of the new revenue
allocation method, and then disallow its attempt to actually apply that
approach in this case.

BNSF raises
two separate arguments challenging how WFA designed its new SAC analysis to
take full advantage of the MMM rate prescription approach.First, BNSF complains that, in its
supplemental evidence, WFA seeks to exploit this process by including (rerouted)
high-rated traffic and dropping low-rated traffic (the rerouting issue).BNSF also claims to have found a “flaw” in
MMM in that it favors short-haul movements over longer-haul movements.We elaborate on each objection below.

WFA
maintains that it is not “gaming” the system, rather it is doing what a shipper
is supposed to do, designing a feasible SARR that maximizes revenues and
minimizes expenses.[10]WFA argues that it is not impermissibly
excluding or adding traffic; instead, it is following the Board’s instructions
allowing it to increase or decrease the traffic carried by the revised SARR.

The new revenue allocation method was adopted specifically to
prevent gaming.[11]Under MMM, traffic group members’ rates are
arrayed on an R/VC ratio basis.[12]MMM then utilizes an iterative process that
first determines the average R/VC ratio for the SARR traffic group movements
and adjusts that average upward (if necessary) to the benchmark R/VC ratio at
which, if all traffic with R/VC ratios above the average are reduced to the
benchmark average R/VC level, and all other rates are left unchanged, the SARR would
cover its SAC costs.[13]Under MMM, carrier gaming is eliminated
because high-R/VC-ratio traffic obtains reductions to the benchmark, and
shipper gaming is eliminated because low-R/VC-ratio traffic that is under the
benchmark obtains no relief.

BNSF confuses the kind of “gaming” by carriers that led to
the adoption of MMM with the logical and proper steps taken by WFA to design
the strongest possible case against the challenged rates, while adhering to the
new procedures adopted in Major Issues.WFA’s choice to replace low-rated traffic with higher-rated traffic is both
logical and permissible.Indeed, every
choice made by a complainant in designing a SARR will be done with an eye to
reducing the maximum lawful rate produced under the SAC test.So long as the complainant does not violate
any SAC rule or principle in the process, the defendant carrier cannot complain
simply because the choice of the traffic group (which rests with the
complainant) is aimed to show the challenged rate to be too high.In short, WFA is not engaged in improper
“gaming” by trying to build the strongest possible case by selecting the
optimal traffic group, so long as it plays by the rules, as it did here.

To correct
this flaw, BNSF developed a regression equation to normalize the R/VC ratios of
the shippers in the SARR traffic group to account for the impact of distance on
R/VC ratios.This approach, according to
BNSF, would eliminate the bias in the rate reductions that would be produced by
applying MMM without a length-of-haul adjustment.

We are not
persuaded that there is a fundamental flaw in MMM that would justify a
departure from Major Issues.MMM
is designed to calculate the maximum mark-up over variable cost that a carrier
can charge any movement in the traffic group.In layman’s terms, the SAC analysis calculates the total revenue the
defendant may reasonably charge for all of the traffic in the traffic
group.Once we have determined how big
that pie is, MMM figures out how to cut the pie into individual sized
pieces:one piece for each shipper in
the traffic group.This piece of the pie
reflects the part of the total SAC costs that each shipper is responsible for
covering.

Because the
share of total SAC costs is expressed on an R/VC basis, a longer movement will
have a bigger piece of the pie than a shorter movement.This was by design.It is entirely reasonable for a movement with
an R/VC ratio of 500% to receive more rate relief than a movement with an R/VC
ratio of 200%.Whether such an imbalance
in R/VC ratios is attributable to differences in distance or other factors, we
see no fundamental flaw with the general principle in MMM that relief should be
provided to those shippers making the highest contribution over variable
cost.

BNSF urges
that—if the evidence supports a finding that the challenged rate is
unreasonable—we limit any rate prescription to 10 years.BNSF acknowledges that in Major Issues
we decided to conduct a 20-year analysis in this case because WFA had already
designed its SARR to accommodate projected traffic growth over a 20-year
period.BNSF claims that the rationale
for using a 20-year analysis period no longer applies to this round of evidence,
however, because the new SAC analysis has less traffic and most of the traffic
growth takes place in the first 10 years.

We find
these arguments unpersuasive.In Major
Issues, we noticed our intention to continue to use a 20-year analysis
period for this case.BNSF did not
object and WFA has performed a 20-year analysis of the reasonableness of the
challenged rates.Having done so, we
should issue a rate prescription for the corresponding period, as is our
long-standing practice.Should
circumstances change materially, either party has the right to seek to have
this case reopened and the rate prescription modified or vacated.As such, BNSF’s request to limit the scope of
the rate prescription and depart from our decision in Major Issues will
be denied.

BNSF makes
three arguments for why the Board should award no damages for movements before
the date of the Sept. 2007 Decision.First, it claims that Arizona Grocery Co. v. Atchison, Topeka &
Santa Fe Railway Co., 284 U.S. 379 (1932) (Arizona Grocery),
precludes the Board from awarding retroactive relief before this phase of the
proceeding.BNSF asserts that the Arizona
Grocery principle applies here because the Board conclusively resolved
WFA’s rate complaint when we found the challenged rate reasonable in the Sept.
2007 Decision and that the rate then became the lawful rate.Thus, the shipments that moved under the rate
addressed in the Sept. 2007 Decision cannot be subject to retroactive
change, it argues.Alternatively, if the
Board considers the Sept. 2007 Decision as a preliminary decision
in this proceeding, rather than a final decision under Arizona Grocery, BNSF
argues that the Board violated the requirement of 49 U.S.C. 11701(c) that the
proceeding be completed within 3 years.Finally,
BNSF asserts that fairness dictates that this decision be given only prospective
relief.

We will
deny BNSF’s request to limit the damages available to WFA.First, Arizona Grocery is not
applicable, as we did not conclusively resolve WFA’s rate complaint in the Sept.
2007 Decision.Rather, we concluded
that, based on WFA’s submission, the rates did not appear to be unreasonably high.But we also recognized that, by our having changed the substantive
standards, WFA had not had a fair chance to make its case.It had designed its case under one standard,
only to have it judged under another.Following well-established legal precedent, we therefore provided WFA an
opportunity to redesign pertinent aspects of its case and submit revised evidence
under the new legal standards. AccordHatch v. FERC, 654 F.2d
825, 835 (D.C. Cir. 1981).Thus, there
was nothing final about the Sept. 2007 Decision.

Second, the
3-year timetable in 49 U.S.C. 11701(c) does not apply to rate cases begun on
complaint.SeeAEP Texas North v. BNSF Ry.,
STB Docket No. 41191 (Sub‑No. 1) (STB served Nov. 13, 2006); Complaints
Filed Pursuant to the Savings Provision of the Staggers Rail Act of 1980,
367 I.C.C. 406 (1983).The timetable
applies only in those circumstances where the Board institutes a proceeding on
its own initiative.

Third,
fairness dictates that WFA receive the full relief afforded it under the
statute.WFA has shown the challenged
rate to be unreasonable under the standards adopted in Major Issues.Accordingly, WFA has a statutory right to
reparations.49 U.S.C. 11704.Under the SAC test, BNSF can charge a rate
that provides a reasonable return on the full replacement cost of the rail
assets needed to serve WFA, but no more.

WFA has adjusted the design of its hypothetical SARR, which
it calls the “Laramie River Railroad” (LRR).The revised LLR would continue to serve a traffic group consisting of
coal traffic moving in unit-train service from PRB coal fields in Wyoming.In addition to the LRS traffic, the LRR would
serve other PRB coal traffic that would be interchanged with the residual BNSF
(i.e., the portion of the BNSF system that would not be replicated by the LRR)
and the Union Pacific Railroad Company (UP).The following analysis will rely on the determinations made in the prior
decisions in this proceeding unless otherwise discussed.

The original LRR would have replicated a portion of BNSF’s
operating division known as the Powder River Division.Its route would have been primarily within
the PRB, extending from Eagle Butte Junction, WY, on the north, to Guernsey and Moba Junction (near Wheatland), WY, on the
south.The LRR’s main line would have started
at Donkey Creek, WY, proceeding south to East Guernsey, WY,
replicating BNSF’s Orin and Canyon Subdivisions.The LRR would have had three branch
lines:the Campbell,
Reno, and Moba
Branches.The Moba Branch would have connected
with the main line at Wendover,
WY, and served LRS.

The original LRR would have interchanged traffic with the
residual BNSF at Campbell, Donkey Creek, Orin
Junction, Guernsey, and Moba Junction,
WY.At Donkey Creek and Guernsey,
the LRR would have interchanged with BNSF at yards.At Campbell, Orin Junction, and Moba Junction,
the interchange points would have consisted of interchange tracks.

The reconfigured LLR, depicted below, would extend from the
northern PRB south to Moba Junction, WY, and east from Wendover, WY, to
Northport, NE.[14]The reconfigured LLR would interchange traffic
with the residual BNSF at Moba Junction, Orin Junction, and Northport.The LLR also would interchange traffic with
the UP at Northport.

BNSF objects to WFA’s rerouting of approximately 19 million tons of PRB
coal traffic on to the reconfigured LRR’s longer network.[15]This includes the movement to Westar Jeffrey Energy Center (JEC), which
accounts for almost half of the rerouted traffic. In the real world, this traffic leaves the PRB
from the north at Donkey Creek, WY, and proceeds to Northport via Edgemont,
SD, and Alliance,
NE.Here, WFA would reroute this traffic south to
exit the PRB via Guernsey to Northport.

WFA maintains that this rerouting of traffic meets the test set forth in
Texas Municipal Power Agency v. Burlington N. & S.F. Ry., 6
S.T.B. 573, 589 (2003) (TMPA) — that the route is reasonable and would meet the shipper’s
transportation needs.WFA argues that
the LRR would meet shippers’ needs because the LRR could move the
rerouted traffic, even in its peak week, at substantially faster transit times
than the BNSF.WFA also asserts that its design for the LRR is
reasonable because the LRR would achieve increased efficiencies and create
densities by moving traffic south out of the PRB.

We find that WFA has satisfied the test for
the inclusion of this traffic in the traffic group.[16]These reroutes—which do not affect the routing
beyond the SARR—are permissible so long as the new route is reasonable and
would meet the receiving shipper’s transportation needs.Under WFA’s operating plan, the shippers in
question will receive the same or superior service along the new route.As such, the reroute meets the shippers’
needs and is thus reasonable.

As in many recent cases, the complainant here relies on
“cross-over” traffic to simplify its SAC presentation.Cross-over traffic refers to movements for
which the LRR would not replicate all of BNSF’s current movement, but would
instead interchange the traffic with the residual portion of the BNSF
system.The use of cross-over traffic to
simplify the SAC presentation is a well-established practice.[17]It enables the SAC analysis to take into
account the economies of scale, scope, and density that the defendant carrier
enjoys over the routes replicated.[18]

When cross-over traffic is used to simplify the SAC
presentation, a key issue is what portion of the revenues from cross-over
traffic should be attributed to the part of the move handled by the SARR
network and what portion to the part of the move occurring off-SARR on the
defendant’s residual network.The
objective is to reflect, to the extent practicable, the defendant carrier’s
relative costs of providing service over each of the two segments.[19]In Major Issues, the Board adopted the
ATC approach to reflect economies of density.SeeMajor Issues at 31.ATC uses URCS variable and fixed costs for the carrier, and the density
and miles of each segment, to develop the average total cost per segment of a
move.Revenues from the cross-over
traffic are then allocated in proportion to the average total cost of the
movement on- and off-SARR.Seeid.
at 34.

Three issues are discussed below.First, we address BNSF’s renewed request to
apply ATC to total revenues rather than to total revenue contribution, a
modification we made in our earlier decision in this case.Second, we clarify how the density of each segment
should be developed for the application of ATC.Finally, we address the application of ATC to rerouted traffic.

In their evidence
submitted in early 2007, the parties allocated the total revenues from the
cross-over movements in accordance with the ATC procedure described in Major
Issues. However, in applying ATC to
this case in the Sept. 2007 Decision, we found it necessary to refine
the procedure slightly so as to avoid an illogical and unintended result. Because the LRR traffic group included
considerable traffic generating revenue either below or barely above variable
cost, and because the off-SARR segments of the movements have lower densities
(meaning those segments are to be assigned a higher pro rata share of the revenues),
the practical effect would have been to drive the R/VC percentages of the
on-SARR movements below 100% (or, if the total revenue is already less than variable
costs, even lower). Thus, the revenue
allocation for the on-SARR portion of those movements would have been
insufficient to cover the variable cost of handling traffic on the highest-density
portion of the movement.To avoid such
an illogical result, instead of applying the ATC allocation procedure to total
revenue, we applied the procedure to total revenue contribution (i.e., revenue
in excess of variable cost). Accordingly,
the revenue assigned to the on-SARR part of a cross-over movement should equal
the variable cost to haul the traffic over the facilities replicated by the SARR
plus the portion of additional available revenue contribution allocated in
accordance with ATC.

BNSF sought
reconsideration of that determination, which we denied in a decision served on
February 29, 2008) (Feb. 2008 decision).BNSF has renewed its objection to this modification here.First, it claims its arguments on
reconsideration were ignored.However, we
addressed BNSF’s arguments in our reconsideration decision and found them
unpersuasive.Alternatively, BNSF argues
that the modification is no longer necessary, because WFA was permitted to
redesign its traffic group and exclude the traffic that caused the illogical
result.We disagree.While there may be less traffic with revenue
at or near its variable costs in this traffic group, the approach we use here
will be applied in all SAC cases, including in cases decided under our
simplified SAC procedures.We seek a
uniform revenue allocation method and remain convinced that the modification
adopted in the Sept. 2007 Decision is reasonable and necessary to
preserve the integrity of the ATC approach.

BNSF has raised an unresolved question over how the
densities of each segment are to be developed:for the line segment being replicated by the SARR, should ATC use the
real-world densities of BNSF line segment or the hypothetical densities of the
SARR.Because WFA designed the SARR to
exclude considerable traffic that BNSF serves over the segments in question,
the hypothetical “on-SARR” densities are much lower than BNSF’s actual
densities.Using those lower densities would
mean that more revenue from a given cross-over movement (holding all other
factors constant) would be attributed to the facilities being replicated by the
SARR.

We conclude that the proper approach is to use the actual
densities of the incumbent railroad.We
reach this conclusion for three reasons.First, as stated in Major Issues, the objective of ATC is to
reflect the defendant carrier's relative costs of providing service over the
relevant segments of its network.

Second, using the hypothetical densities would create
mismatches in the analysis.ATC uses the
actual variable costs of the incumbent and the actual fixed cost per route
mile.It would bias the result and
create an apples-to-oranges comparison to combine those estimates with hypothetical
densities.Moreover, while WFA would
lower the densities on-SARR by excluding considerable PRB traffic, that traffic
is not excluded from the off-SARR density calculation, leading to a further
mismatch if traffic were omitted in the on-SARR densities but reflected in the off-SARR
densities.

Finally, using the densities of the hypothetical SARR makes
no sense, as under SAC the hypothetical competitor to BNSF does not even need
to be a railroad at all.WFA could elect
to construct a hypothetical truck-transload facility, where the coal would be
trucked from the PRB to a transload facility, where it would be loaded back
into rail cars for delivery by BNSF.Or
it could construct a coal-slurry pipeline.These examples are offered to illustrate the problems with WFA’s
approach:in neither case would it make
any sense to use BNSF’s variable costs and fixed costs per route mile in combination
with the densities (including the weight of the water, we suppose, in the coal
slurry pipeline instance) of the hypothetical competitor designed by WFA.

Noting that this issue has only a marginal effect on this
case, WFA objects nonetheless, claiming that basing the revenue allocation on
the incumbent’s greater densities would penalize the SARR for being more
efficient than BNSF.We find this
argument unpersuasive.WFA still
benefits from designing the SARR to be more efficient than BNSF, because this
lowers the SAC costs and the resulting maximum lawful rates.The revenue allocation method is not designed
or intended to provide an additional reward for designing a more efficient
SARR.It is designed to reflect the
defendant carrier’s relative costs of providing service over the relevant
segments of its network and thereby create a reasonable and fair allocation of revenue
from cross-over movements.

Having clarified that ATC will allocate revenue contribution
in accordance with the defendant’s costs and using the defendant’s densities,
we also need to clarify which route we will use in performing that
calculation:the historical route actually
used by the defendant or, where rerouting is hypothesized, the route assumed by
the complainant in its SAC analysis.In general,
we witness two kinds of rerouted cross-over traffic in SAC cases.There can be rerouting that is local to the
SARR, meaning that any difference in routing would be limited to the portion of
the move handled by the SARR; there would be no difference from the historical route
in the portion of the move handled by the defendant railroad.There is a rare second category of cross-over
traffic where a complainant seeks to interchange the traffic with the defendant
carrier on a route other than the route actually used by the defendant for that
traffic, which thus assumes a rerouting of traffic beyond the SARR and is
referred to as “off-SARR rerouted traffic.”(For three examples of off-SARR rerouted traffic, see TMPA.)

In this case, the traffic group contains some local rerouted
cross-over traffic that BNSF historically moves out of the PRB through the
northern route (via Donkey Creek), but which WFA assumes would be rerouted over
the SARR, which replicates only BNSF’s southern route.The traffic would be interchanged with BNSF
at Northport, which is a point on its historical route.To be consistent with the use of the
defendant’s costs, ATC will allocate revenues using the relative densities (and
mileage) along the predominant route actually used by the defendant carrier to
move the traffic in question.Thus, regardless
of whether the SARR is designed to shorten or lengthen the distance traveled for
that portion of the cross-over movement, the revenue allocation for that
portion of the movement is unaffected.

Fortunately, WFA included no off-SARR rerouted cross-over traffic in this case.But we are concerned that complainants might
seek to include such traffic in the future.There is seemingly no coherent way to allocate the revenue contribution
in accordance with the defendant’s costs of providing service in such
circumstances, as the defendant does not actually provide those services in
that manner in the real world.The off-SARR
rerouting would affect the densities, mileages, and perhaps even the operating
costs of the route, thus making it difficult to rely on URCS and the historical
traffic densities to allocate revenue contribution in accordance with the
average total cost of providing service over the segments in question.

Given the inherent problems with such off-SARR rerouted
traffic, the extraordinarily complex issues those reroutes introduce into the
SAC analysis, and the inability to allocate revenues in accordance with the
actual costs of the defendant railroad, we are disinclined to permit such
reroutes.If a complainant seeks to
include such rerouted cross-over traffic in the SAC analysis, even if it
shortens the overall length of the total movement (seeDuke/NS),
it should both (1) address how to allocate revenues in accordance with the
defendant carrier’s actual costs of
providing the transportation service and (2) provide an alternative SAC
analysis where there are no off-SARR reroutes.

How a SARR would operate is a prime determinant of the
configuration (physical plant) and annual operating expenses of the SARR.The operating plan must be able to meet the
transportation needs of the traffic the SARR proposes to serve.It need not match existing practices of the
defendant railroad, as the objective of the SAC test is to determine what it
would cost to provide the service with optimal efficiency.However, the assumptions used in the SAC
analysis, including the operating plan, must be realistic, i.e., consistent
with the underlying realities of real-world railroading.

WFA based the reconfigured LRR’s operating plan on the
original LRR’s operating plan as modified in the Sept. 2007 Decision.The primary changes that WFA made to that
operating plan include revisions to the LRR’s route, track configuration, and
traffic group.WFA continues to use the
Rail Traffic Controller (RTC) model, which it used to test the revised
operating plan against the LRR’s revised configuration.The model simulates the flow of traffic
projected for the peak week (September 2 through September 8) of the peak year
(2024) over the revised LRR.The model
permits WFA to both test the adequacy of the configuration (to make sure the LRR
would have sufficient capacity to handle the peak forecast demand) and then to
derive the segment-by-segment cycle times (which it then used to develop the
operating costs of the revised LRR in the base year).

The parties agreed on most elements of the revised LRR
operating plan and WFA incorporated agreed-upon modifications into its rebuttal
RTC simulation.We accept WFA’s
operating plan based on its adjusted RTC simulation and the transit times
generated.The substantive disagreements—which
relate to the interchange at Northport and train and engine (T&E) personnel—are
discussed below.

BNSF first disputes the location specified for the LRR interchange
with UP at Northport.[20]BNSF argues that WFA’s operating plan does
not provide for SARR crews to take the JEC trains that would need to be
interchanged with UP all the way to the UP interchange tracks. Instead, the SARR crews would stop at the end
of the SARR’s tracks, 2.6
miles short of the point where BNSF crews currently
deliver JEC trains to UP.BNSF
also asserts that WFA did not allot time to move the JEC trains which BNSF
estimates would take approximately 15 minutes.

On rebuttal, WFA argues that its RTC
simulation included operating the JEC trains over 2.0 miles of UP trackage
east of the Angora Subdivision to reach the UP interchange.[21]For purposes of its rebuttal RTC simulation,
WFA accepted BNSF’s configuration and distance for the UP trackage in its RTC
simulation[22] and let
the model determine how long it takes a train to travel the total distance of 2.6 miles to and from the
interchange point, rather than using the 15 minutes added by BNSF.We agree with WFA that the modification of its
RTC model to include the 2.6
miles and to simulate the running times on the UP track
is the proper way to address the interchange distance at Northport.

The revised
LRR would interchange with both UP and the residual BNSF at Northport.According to BNSF, WFA’s arrangements for these
interchange operations are inadequate.BNSF asserts that the operating plan ignores tasks that must be
performed to interchange traffic where three railroads cross each other’s
track.Therefore, BNSF would include
additional time for the LRR to interchange trains with either BNSF or UP.More specifically, BNSF would increase the
LRR’s interchange times as follows:Southbound
loaded trains to BNSF from 45 minutes to 90 minutes; northbound loaded trains
to BNSF from 30 minutes to 60 minutes; JEC loaded trains to UP from 30 minutes
to 60 minutes; and JEC empty trains to UP from 30 minutes to 60 minutes.[23](BNSF would not change the interchange time
for empty trains received from BNSF.)

BNSF asserts that the 30-minute interchange times are
unreasonably short given that BNSF’s real-world average dwell time at Sterling
for these crew changes is 85 minutes.[24]In support of its assertion that a 90-minute
dwell time is the reasonable time needed for trains that are headed south from
Northport to Sterling, BNSF makes the following four points:(1) it would take time for a BNSF crew to
arrive after the LRR brought a train to the interchange point—as Northport is
not a crew change point for BNSF—and BNSF would have to taxi crews from
Sterling to pick up loaded trains from the LRR;(2) the interchange time must provide for holding trains on the LRR’s
tracks until BNSF could accommodate them on its main line heading south; (3)
the operating plan must allow sufficient time for interchanged trains to wait
at Northport until the UP main line—which is 500 feet south of the LRR interchange
point—were clear and; (4) BNSF crews would need additional time to add a
fourth locomotive to the rear of the train before leaving the LRR trackage at
Northport.[25]

WFA, on rebuttal, states
that the 30 minutes of dwell time at Northport would be consistent with the
train dwell times at the Guernsey interchange
point allotted in WFA’s original operating plan and accepted by the Board in
the Sept. 2007 Decision.[26]WFA argues that BNSF’s real-world crew-change
times at other locations are irrelevant to crew-change and train dwell times
involving a SARR.In response to BNSF’s
arguments, WFA first claims that Northport is in fact an established BNSF
crew-change point for southbound and JEC trains, and thus, BNSF’s assertion
that crews would have to be taxied to Northport from Sterling is incorrect.[27]Second, WFA states that BNSF would
not need to accommodate LRR trains heading south because the LRR would
not have to account for real-world BNSF trains moving through Northport on the
Angora Subdivision.[28]Rather, the LRR would replace BNSF on the
lines it replicates and it would not have to account for the residual
incumbent’s remaining trains that use the replicated lines.[29]Third, WFA argues that BNSF only speculates
on the amount of time interchanged trains would have to wait at Northport, and BNSF’s
assertion is not supported by any empirical data concerning the actual delays
that southbound BNSF coal trains incurred during the relevant (peak) period of
the base year waiting for UP trains to clear the crossing.[30]Finally, according to WFA, under the LRR
operating plan, the inbound LRR crew would place a fourth locomotive unit on
the rear of the train, not the outbound BNSF crew.[31]WFA also states that no additional time would
be needed to establish another distributed power (DP) communications link.WFA’s operating plan (and the rebuttal RTC
simulation) allots an extra 15 minutes to add the fourth locomotive unit to
southbound trains at Northport, for a total of 45 minutes of dwell time for
those trains.

We accept WFA’s dwell times as the best evidence of
record.It is reasonable to assume that BNSF
would have an established crew change at Northport due to the UP interchange,
and the volume of residual BNSF traffic there would further warrant BNSF crews
for the LRR interchange.Moreover, we
are satisfied that the LRR’s plan provides for its own trackage, eliminating
any need to cross the Angora subdivision, which in turn eliminates a need to hold
trains on a shared track on that basis.We
find BNSF’s other arguments as to why trains would be held up at the UP
crossing unsupported.We agree that a DP
locomotive on the rear of the train would mean that the communication link with
the head-end power would already be established.The actual attachment of the additional
locomotive would be sufficiently covered by the 15-minute allotment for adding
a locomotive to trains moving southward beyond Sterling.Finally, we agree that the dwell time at Sterling is not necessarily relevant to the
SARR, much less dispositive of the appropriate dwell time at Northport.

There is
not a substantial difference between the parties’ estimates of the level of
investment that would be required to construct the revised LRR.Our resolution of the disputes concerning
various component parts of road property investment is discussed in Appendix C.As shown in Table C-1, we find that total road property investment costs for
the revised LRR would be $881,180,459.

E.DCF Analysis

A discounted cash flow (DCF) analysis is used to distribute
the total capital costs (in current year dollars) of the revised LRR over the
SAC analysis period.Operating expenses
are calculated for a base year and forecast into other years by indexing for
inflation and forecasted changes in tonnage.The revised LRR’s total revenue requirements (capital and operating
expenses) are then compared against the stream of revenues BNSF is expected to
earn from the revised traffic group, discounted to the starting year (2004).

In this supplemental round, the only dispute between the
parties over how to perform the DCF analysis is over how to estimate the cost
of equity, a key input in the model.Our
analysis of that debate is set forth below, followed by a summary of the revised
DCF results.

To estimate what it would cost a SARR to raise equity capital,
the longstanding practice in SAC cases is to use the cost of equity for the
rail industry as published annually by the Board.Because we had recently revised our
procedures for calculating the rail industry’s cost of equity,[32]
replacing the single-stage DCF model with a Capital Asset Pricing Model (CAPM),
WFA sought reconsideration of the Sept. 2007 Decision on the ground that
the newly adopted CAPM procedure should be used to develop the cost-of-capital
figure in the SAC analysis in this case for the years 2002 through 2005.

We reserved judgment on the issue of whether to restate the
rail industry’s cost-of-capital figures in this case for those years until the
parties had the opportunity to fully brief and argue the merits of WFA’s
request.We directed the parties to
submit two separate SAC calculations, one showing their cost-of-capital figures
developed under the already published cost-of-equity figures for those years,
and a second showing the cost of equity calculated under CAPM for those years.In addition, each party was asked to address
the propriety of using restated figures in this case, and whether, if we do not
use restated figures, the forecast of the cost of equity in succeeding years should
be calculated by taking an average of past cost-of-equity figures, consistent
with past practice, or to use only the most recent cost-of-equity figures based
on CAPM.

In the next sections, we will discuss the evolution of the
Board’s cost-of equity methodology and address the most appropriate methodology
to apply to calculate the cost of equity in this rate case.For the reasons discussed below, we will not restate
the cost of equity for past years in this case.We will also apply our existing methodology for forecasting the cost of equity
in future years.

Each year, the Board measures and publishes the average cost
of capital that the railroad industry experienced in the previous year.The Board then uses this cost-of-capital
figure for a variety of regulatory purposes.[33]The Board calculates the cost of capital as
the weighted average of the cost of debt and the cost of equity, with the
weights determined by the overall capital structure of the railroad industry
(i.e., the proportion of capital from debt or equity on a market-value
basis).While the cost of debt is
observable and readily available, the cost of equity (the expected return that
equity investors require) can only be estimated.Because the cost of equity cannot be directly
observed, estimating the cost of equity requires adopting a finance model and
making a variety of simplifying assumptions.

In the proceeding to determine the railroad industry
cost-of-capital for 2005, the Western Coal Traffic League (WCTL) challenged the
cost-of-equity calculation submitted by the Association of American Railroads
(AAR) using the DCF approach routinely applied by the Board in previous annual
cost-of-capital proceedings.WCTL advocated
replacing the DCF methodology with a CAPM method.We concluded that there was insufficient
evidence in that annual cost-of-capital determination proceeding to justify a
departure from long-established methodology used to calculate the
cost-of-equity component.[34]

In so doing, we observed that there was no clear consensus
as to how best to compute the cost of common equity and, in fact, there are
many different ways in which it is computed by both investors and
regulators.We expressed concern that “CAPM
requires the use of many assumptions … [and each] can have a significant effect
on the result obtained and each necessitates judgments on how best to define
and measure it.”[35]We noted that WCTL’s position in that
proceeding was contrary to the prior position of the shipper community that the
“CAPM technique was conceptually and technically flawed.”[36]Due to the norm of regularity in
government conduct that presumes an agency’s duties are best carried out by
adhering to the settled rule, we continued to use the DCF model in determining
the 2005 railroad industry cost of capital.We concluded that we could not
delay our decision while we explored this issue in depth because the cost-of-capital
calculation is an integral component of many other decisions the Board must
make, including the revenue adequacy determination that we are statutorily
required to make annually.[37]

At the same time, we recognized that WCTL had identified a
potential concern with the DCF model that should be explored in more
depth.We explained that, before
considering whether to make such a significant change, we would seek broader
public input from other interested shippers, as well as from transportation
experts, Wall Street analysts, financial experts and academics on the relative
merits of this longstanding approach.And we would seek comments not only on the DCF and CAPM models, but on
any other available recognized methods for determining the cost of
capital.Accordingly we issued an
advance notice of proposed rulemaking, in STB Ex Parte No. 664, to explore
the most suitable methodology to calculate the cost of capital.[38]

After holding public hearings, reviewing the evidence
gathered, and consulting with other federal agencies, the Board changed the
methodology that it uses to calculate the railroad industry’s cost of equity.[39]We concluded that the time had come to
modernize our regulatory process and replace the aging single-stage DCF model
that had been employed since 1981, and we decided to calculate the cost of
equity using CAPM.

In that proceeding, several parties had suggested that the
Board use a multi-stage DCF in conjunction with CAPM.We elected to adopt a stand-alone CAPM
approach because the record in that proceeding did not support adopting any
particular DCF model at that time.But
we did not want to foreclose the possibility of augmenting CAPM with a DCF
approach.Ultimately, both CAPM and DCF
are economic models that seek to measure the same thing.CAPM seeks to do so by estimating the level
of expected returns that investors would demand given the perceived risks
associated with the company.By contrast,
DCF models estimate the expected rate of return based on the present value of
the cash flows that the company is expected to generate.Both approaches are plausible and intuitive,
but are merely models.There is
considerable economic literature that suggests that using multiple models will
improve estimation techniques when each model provides new information.

Although the record before us in STB Ex Parte No. 664 was
insufficient for us to adopt a particular DCF model, it illuminated a number of
criteria to guide us in that effort.Therefore, we soon issued an advance notice of proposed rulemaking, in STB
Ex Parte No. 664 (Sub-No. 1), requesting comments on using of a
multi-stage DCF model to complement the use of CAPM in determining the railroad
industry’s cost-of-capital.[40]After reviewing the public comments, we proposed
to use the Morningstar/Ibbotson three-stage DCF, together with CAPM, to
calculate the cost of equity.We
proposed to use the average of the two values to establish the railroad
industry’s cost of equity in a given year.By a decision served on January 28, 2009, we adopted the proposed
methodology to calculate the cost of equity in future years.[41]

Thus, we have made great efforts to modernize and reform our
regulatory processes and economic estimates over the past 2 years.As we explained in STB Ex Parte No. 664
(Sub-No. 1), the average of CAPM and the multistage DCF produces the best
estimate of the rail industry’s cost of equity for our purposes by providing a
more stable, less volatile estimate from year to year.But the exact cost of equity in a given year
remains an essentially unknowable number and any method we adopt will produce only
an estimate.Our goal has been to
establish the methodology that produces the best estimate practicable for our
regulatory purposes.

In deciding whether a change in methodology (such as the
move to CAPM) can be given retroactive effect, we would generally balance
various considerations.For example, the
United States Court of Appeals for the District of Columbia has offered five
factors to be considered, such as: (1) whether the case is one of first
impression; (2) whether the new approach reflects an abrupt departure from
well established precedent or merely fills a void in an unsettled area; (3) the
degree of reasonable reliance on the former rule; (4) the degree of burden
imposed on a party; and (5) the statutory interest in applying a new rule
despite the reliance of a party.See,
e.g., Williams Natural Gas Co. v. FERC, 3 F.3d 1544 (D.C. Cir.
1993).

But BNSF argues we have no discretion and must use the
previously published cost-of-equity figures.It argues that the annual cost-of-capital determinations must be viewed
as “quasi-legislative” determinations that are used in rate reasonableness
proceedings and that we must, under Arizona Grocery, give full effect to
those prior quasi-legislative findings.BNSF
acknowledges that Arizona Grocery dealt only with retroactive
ratemaking, but argues that the principle announced in that case applies
broadly to all quasi-legislative determinations of an agency.Yet it offers no example of any court or
agency applying the Arizona Grocery principle outside the context of
rate prescriptions.And WFA cites modern
cases that declare that Arizona Grocery applies only where the agency has declared what is the maximum lawful rate
to be charged by a carrier.[42]

Based on the legal arguments presented here, we conclude that
we have the discretion to use a different cost-of-equity figure than previously
published.These circumstances appear
closely analogous to those presented in Williston Basin Interstate Pipeline
Co. v. FERC, 165 F.3d
54 (D.C. Cir. 1998), where the court remanded a rate case to FERC so the agency
could decide whether to give retroactive effect to a change in the method FERC
used to estimate the cost of equity.

In deciding whether to use different cost-of-equity figures
than previously published, we conduct the kind of balancing test described
above.In so doing, we conclude that it
would be poor public policy to depart from our previously published figures. Two considerations are paramount in our
analysis:the degree of reliance by the
railroad industry on our prior findings, and whether the prior findings appear to
be within the bounds of reasonable predictions for the industry’s cost of equity.

Reliance.We believe there has been significant
investment-back reliance by the railroad industry on our prior cost-of-capital
findings. Generally, we use our annual
cost-of-capital findings for the railroad industry for the years at issue to
determine the cost of equity that a SARR would experience.[43]Though Guidelines suggested that a
party could show that a particular SARR might have a cost of equity different from
the railroad industry as a whole by presenting particularized evidence,[44]
no party has done so.Instead, parties
rely on our served and published cost-of-capital findings, updated by the Board
to include the most recent figures, as we do not generally consider collateral
attacks on the cost-of-capital methodology in the context of an individual rate
case due to the settled expectations our findings create.[45]

In short, the published cost-of-capital figure lets the
railroads and their investors know the target rate of return this agency will
consider a reasonable return on the railroad’s capital investments in that
year.Railroads and investors then make
investment decisions based in part on those published figures.Indeed, between 2004 and 2007, BNSF alone
made over $9 billion in capital investments.[46]Other factors may be equally, if not more,
important in these capital investment decisions, such as prevailing market
forces and future forecasts of demand trends.But the attention paid to our recent rulemaking on the cost of capital
by the railroads and their investors demonstrates the importance of this figure
and our annual findings.If we change
that figure retroactively here, we not only undermine settled expectations but
we erode investor confidence in future
cost-of-capital findings.A lack of
confidence can severely affect the incentive of investors to make the necessary
private investment in the railroad industry to meet the forecast demand for
railroad service.[47]

Accordingly, we set a high bar on the evidence needed to
justify departing from these prior published findings.Here, WFA contends that we should use CAPM to
establish the cost of equity for the years 2002 through 2005 because CAPM
“produces the most accurate results.”[48]But the bare fact that a new method results
in different cost-of-capital estimates is insufficient.There may often be some new financial model
that would generate a different and arguably more precise cost-of-capital
estimate.Yet we believe that, while
investors and railroads have made important capital investments in reliance on
these published figures, they do so with the knowledge that the Board has the
authority and responsibility to depart from prior published findings in an
individual rate case if those figures are shown to be widely inaccurate.

Accordingly, balancing the reliance interests of carriers
and their investors against the public interest in using a reasonable rate of
return target, we will set aside our cost-of-capital findings only if the prior
published findings are shown to clearly fall outside a reasonable range. This is an admittedly subjective criterion,
but necessary to protect the reliance interests and assure future investors that
they can generally rely on our annual cost of capital findings. Our analysis of our prior cost-of-equity
findings under this approach is set forth below.

Reasonableness.CAPM is a more modern and better accepted
method for estimating the cost of equity than the single-stage DCF model used
to derive the 2002‑2005 cost-of-equity figures at issue here.We have, however, repeatedly made clear that
there are many ways to estimate the cost of equity.Indeed, at the time WFA filed its petition
for reconsideration, the STB Ex Parte No. 664 (Sub-No. 1) proceeding to
consider use of a multi-stage DCF was already underway.The adoption of CAPM did not invalidate the
past estimates of the cost of equity measured by the single stage DCF.Nor did the recent adoption of the average of
CAPM and a multistage DCF to measure the cost of equity invalidate the 2006 and
2007 estimates established by CAPM.The
evolution of our approach for estimating the cost of equity demonstrates why it
is unwise to retroactively change our findings simply because a new model is
now used.

WFA has not shown that the use of the previously published
findings produces a wholly unreliable estimate of the cost of capital for the
SARR.Moreover, our comparison of the
Board’s annual determinations reveals that they are not out of line with other,
commercially available estimates of the cost of equity.Below, we compare the Board’s previously
published determinations of the rail industry’s cost of capital (denoted below
by the “STB EP 558”
line) with other commercially accepted methods of determining the same
estimates.[49]

This chart illustrates that various reasonable finance models
produce a range of values for the cost of equity.Which model will produce the highest or
lowest estimate will vary depending on the inputs and assumptions used.For example, in 1994, CAPM produces the
highest estimate and for the period 2001-2005, it produces the lowest.Simply because one estimate is the highest or
lowest in a given year does not mean that it is invalid, or even the least
accurate.It is for this reason that we
have decided that the best estimate we can establish for future years will be
the average of two different models with different assumptions.

The chart also reveals that the Board’s prior determinations
provide a reasonable estimate of the cost of equity for the hypothetical SARR
posited in this case.For every year
except 2005, the Board’s estimate falls easily within the reasonable range of
estimates produced by the other finance models.

The year 2005 is the only year where the Board’s cost-of-equity
estimate is above the norm for other finance models.Yet even then, the figure does not vary
significantly more than other models that produce the highest or lowest
estimate in a given year.Thus, we do
not regard the increase as sufficiently large to justify setting aside the
industry’s expectation that we would use that finding as the target rate of
return for that year.In our judgment
the 2005 estimate remains within a reasonable range of the cost-of-equity
estimates produced by other models.Accordingly, we will not disturb it.

Our decision to use the published cost-of-equity figures in
the SAC analysis for all prior years does not end the inquiry, as we must also
project the cost of equity into the future years of the DCF analysis in this
case.Our long-established practice has
been to use the average of the historical cost-of-capital figures starting with
the construction start date of the SARR.We do so to minimize the risk that any particular year is aberrant in
one way or another.Under that practice,
here we would forecast the cost of equity for the years 2008 through 2024 as
the average of the historical cost of equity from the years 2002 through 2007.

WFA advocates that we depart from that practice and use just
the CAPM estimate for 2006 and 2007 to forecast the cost of equity for the
years 2008 – 2024.It maintains that this
will provide a superior cost-of-equity estimate because those are the only
estimates based on CAPM and we should not carry forward figures derived from
the single-stage DCF model.

We conclude that it remains sound policy to adhere to our
established practice.We recently
concluded that using an average of the cost-of-equity estimates produced by CAPM
and a multi-stage DCF would produce a less volatile and more reliable
estimate.Taking the average of all historical
years in the DCF to project the cost of equity will similarly reduce the risk
that any one year’s aberrant estimate would have on the overall forecast for
the DCF period.Indeed, given our
decision to use an average of CAPM and a multi-stage DCF to estimate the cost
of equity in 2008 and future years, it would seem clearly erroneous to forecast
the cost of equity in this case by using just the published CAPM figures for
2006 and 2007.Accordingly, we will use
our established approach for forecasting the cost of equity.

The first
step of the DCF analysis is to calculate the revised LRR’s total revenue
requirements over the 20-year analysis period.We find that the initial road property investment of the revised
SARR in the last quarter of 2004 would be $843,733,703; interest during
construction would be $99,048,840; the present value of roadway property
replacement would be $66,058,308; and the resulting total road property
investment would be $1,008,840,851.Table 1
shows that the flow of capital
recovery would provide the revised LRR a reasonable return on its capital
investment, and it would therefore be sufficient to attract entry to serve the
selected traffic group.

Table 1

LRR Capital
Recovery

Year

RPI Capital Recovery

Taxes

Cash Flow

Present Value

(1)

(2)

(3) = (1) - (2)

(4)

2004

$20,506,286

$
0

$20,506,286

$20,260,790

2005

82,940,254

0

82,940,254

76,836,688

2006

87,124,894

0

87,124,894

73,578,930

2007

89,194,629

0

89,194,629

69,131,694

2008

90,815,381

0

90,815,381

64,290,439

2009

92,421,892

0

92,421,892

59,723,893

2010

94,011,631

0

94,011,631

55,451,673

2011

95,638,418

0

95,638,418

51,489,558

2012

97,824,824

0

97,824,824

48,069,187

2013

100,577,341

4,320,485

96,256,856

43,159,882

2014

103,460,839

27,155,050

76,305,789

30,783,139

2015

106,410,846

28,501,671

77,909,175

28,675,966

2016

109,428,883

29,888,442

79,540,441

26,711,339

2017

112,521,593

31,318,502

81,203,091

24,880,309

2018

115,717,292

32,802,512

82,914,780

23,178,826

2019

119,019,603

34,505,425

84,514,178

21,554,342

2020

122,432,278

37,401,718

85,030,560

19,773,449

2021

125,959,208

40,198,235

85,760,972

18,175,528

2022

129,604,420

41,920,856

87,683,564

16,955,125

2023

133,372,093

43,709,328

89,662,765

15,819,031

2024

102,577,707

33,996,809

68,580,898

11,166,022

Terminal Value

***

$209,175,042

TOTAL

$1,008,840,851

The total revenue requirements of the revised LRR over the 20-year
analysis period, shown in Table 2,
are the sum of the capital return and the projected operating expenses.

Table 2

LRR Total Revenue Requirements

Year

RPI

Capital
Recovery

Operating

Expenses

Revenue

Requirements

2004

$20,506,286

29,482,962

49,989,248

2005

$82,940,254

122,253,931

205,194,185

2006

$87,124,894

122,329,508

209,454,402

2007

$89,194,629

124,146,250

213,340,879

2008

$90,815,381

125,837,475

216,652,855

2009

$92,421,892

131,554,250

223,976,142

2010

$94,011,631

133,366,400

227,378,030

2011

$95,638,418

135,226,499

230,864,917

2012

$97,824,824

137,513,144

235,337,968

2013

$100,577,341

140,113,048

240,690,389

2014

$103,460,839

142,395,655

245,856,493

2015

$106,410,846

142,893,082

249,303,928

2016

$109,428,883

146,122,818

255,551,700

2017

$112,521,593

150,417,225

262,938,818

2018

$115,717,292

153,947,620

269,664,912

2019

$119,019,603

156,874,468

275,894,071

2020

$122,432,278

160,072,726

282,505,005

2021

$125,959,208

163,271,382

289,230,590

2022

$129,604,420

166,328,195

295,932,616

2023

$133,372,093

169,386,768

302,758,861

2024

$102,577,707

129,095,724

231,673,431

The second
part of the DCF analysis compares the revenues the defendant is expected to
earn from the traffic group against what the SARR would need to serve the same
traffic.In general, if the present
value of the revenue stream is less than the SARR’s revenue requirements, then
the analysis has not demonstrated that the challenged rate is
unreasonable.If the opposite is true,
then the Board must decide what relief to provide to the complainant by
allocating the revenue requirements of the SARR among the traffic group and
over time.Here, Table 3 reveals that BNSF is earning more from the traffic group
than the LRR would require to serve the same traffic.

In Major Issues the Board adopted a new rate
prescription approach, called MMM.BNSF
objects to the use of MMM for two reasons, discussed above.Despite BNSF’s objections, we will use MMM to
set the rate in this proceeding.

This
is one of the first rate disputes to apply MMM.In implementing the new approach, we have uncovered an inconsistency
between how we said we would forecast the base-year URCS variable costs and the
basic objective of the MMM.We describe
the issue and our solution below.

MMM seeks to
determine how much differential pricing the defendant carrier must be permitted
in order to recover the total SAC costs and therefore earn what we find to be a
reasonable return on its capital investments.If the defendant has a significant amount of low-rated traffic (traffic
with low R/VC ratios), more differential pricing is needed.If the opposite is true and the railroad moves
a greater amount of high-rated traffic, less differential pricing is needed.The MMM analysis is based on the actual
distribution of R/VC ratios of the traffic group, thus reflecting the ability
(or inability) of the railroad to recover a pro-rata share of SAC costs from
all its traffic due to the presence of competitive alternatives and real market
forces.

Because we use
a multi-year analysis, we need to forecast market conditions to see how much
differential pricing the defendant would need over the entire DCF analysis
period (here, 20 years).In this effort,
we use the best forecast of record for the defendant’s future traffic volume
and rates.In Major Issues, we
proposed to use a hybrid of the RCAF-A and RCAF-U indexes to forecast the
base-year variable costs of the defendant carrier into the future.[50]
Though the primary purpose of the hybrid approach was to forecast the operating
expenses of the SARR, we proposed to also apply that figure to the defendant’s other
variable costs in MMM.No one commented
on its use in MMM during the rulemaking and it was adopted.

As we apply MMM
for the first time, we now believe that use of the hybrid approach would distort
the actual distribution of R/VC ratios and the degree of differential pricing
the carrier will need in future years.Moreover, the base-year variable costs used in MMM are the defendant's
variable costs estimated by URCS, not the variable costs of the SARR.As such, forecasting those variable costs to
increase at the same rate as the total operating expenses of the SARR is improper,
as we have previously concluded that the productivity of the hypothetical SARR
will differ from that of the actual railroad industry.See Major Issues at 43.

In sum, for MMM
to correctly calculate the degree of differential pricing needed by the defendant
railroad to recover the total SAC costs over the DCF analysis period, we need
to properly forecast the defendant carrier’s variable costs.To do so accurately, we must use the RCAF‑A
index, not a combination of the RCAF-A and the RCAF-U index as was proposed in Major
Issues.We conclude that this technical
change is not sufficiently significant to warrant a new rulemaking, as
illustrated by the failure of any party to comment on that aspect of MMM.We will therefore implement this modification
to MMM here.

Under MMM, the maximum lawful rate is expressed as an R/VC
ratio.Our calculation of the maximum
R/VC ratios BNSF may charge the issue movements pursuant to MMM is set forth in
Table 4 below.

Table 4

Maximum R/VC Ratio

Year

Maximum MMM

R/VC

4Q 2004

241%

2005

244%

2006

229%

2007

236%

2008

243%

2009

240%

2010

244%

2011

245%

2012

247%

2013

249%

2014

253%

2015

266%

2016

267%

2017

263%

2018

260%

2019

260%

2020

259%

2021

258%

2022

259%

2023

259%

2024

257%

BNSF is ordered to reimburse WFA for amounts previously
collected above these prescribed levels, together with interest to be
calculated in accordance with 49 CFR 1141.BNSF is also ordered to establish and maintain rates for movements of
the issue traffic that do not exceed the maximum reasonable R/VC ratios prescribed
in this decision. For purposes of
calculating reparations and setting the maximum rate for future movements, the
variable cost of the issue movements must be calculated pursuant to unadjusted
URCS, with indexing as appropriate.If
the parties cannot agree on the amount of reparations due, or if there is a
dispute over how to calculate the variable cost of the movements at issue, WFA
should bring those disputes to our attention.

This
decision will not significantly affect the quality of the human environment or
the conservation of energy resources.

It is
ordered:

1.BNSF’s motion to strike is denied.

2.BNSF’s motion to dismiss is denied.

3.BNSF is ordered to pay reparations to WFA in
accordance with this decision and to establish and maintain rates for movements
of the issue traffic that do not exceed the maximum reasonable revenue-to-variable
cost levels prescribed in this decision.

This appendix addresses the amount of total traffic (both
coal and non-coal) that the revised LRR would transport, and the total revenues
that traffic is expected to generate over the 20-year SAC analysis period,
i.e., from the 4th quarter of 2004 through the 3rd
quarter of 2023.

As
discussed in the body of this decision, we use the ATC approach to allocate
cross-over revenues.The
differences between our findings and those presented by WFA are attributable to
the way we calculated densities.Our
findings are set forth in Table A‑2.

This appendix
addresses the annual operating expenses that would be incurred by the revised
LRR.The manner in which a railroad
operates and the amount of traffic it handles are the major determinants of the
expenses a railroad incurs in its day-to-day operations.As discussed in the body of the decision, we
use WFA’s proposed operating plan for the revised LRR.Accordingly, except as specifically
discussed, we use WFA’s operating assumptions to determine the level of
operational resources the revised LRR would need for a given level of
traffic.Table B-1 summarizes the operating cost estimates reflected in the
parties’ evidence and the figures used by the Board.

Table B-1
LRR Operating Costs
($ millions)

WFA

BNSF

STB

Train &
Engine Personnel

18.6

18.6

18.6

Locomotive
Lease

8.1

8.7

8.1

Locomotive
Maintenance

7.9

8.4

7.9

Locomotive
Operations

29.9

30.3

29.9

Railcar Lease

3.8

4.1

3.8

Materials
& Supply Operating

1.1

1.1

1.1

Ad Valorem
Tax

2.0

2.0

2.0

Operating
Managers

8.8

8.9

8.9

General &
Administrative

11.0

11.0

11.0

Loss &
Damage

0.03

0.03

0.03

Maintenance-of-Way

15.5

15.9

15.3

Insurance

3.4

3.5

3.4

Startup and
Training

7.1

7.1

7.2

TOTAL*

117.2

119.7

117.2

*Totals may differ
slightly from the sum of the individual items due to rounding.

Locomotive requirements are primarily determined by how the
LRR would operate.The parties agree
that all coal trains would be operated on the revised LRR system with three
SD70MAC locomotive units in a 2/1 distributed power configuration.[52]Both parties also agree on the unit cost of
leasing the locomotives, along with the required number of SD40-2 locomotives.[53]The parties disagree on the number of road
locomotives.The difference in the
number of road locomotives stems from the difference in the parties’ assessment
of transit times.

BNSF asserts that the transit times that WFA assumed for the
LRR would be too short because WFA does not account for the additional time and
track that BNSF argues would be needed at the interchange point at Northport.[54]But as discussed in the body of this
decision, we use WFA’s interchange times at Northport.

Because of the revisions WFA made to its RTC simulation on
rebuttal, the LRR’s cycle times increased.[55]Thus, WFA adjusted its locomotive
requirements.Because we accept WFA’s
operating plan, we use WFA’s number of locomotives, as adjusted on rebuttal.

Using the modified peak-week operating statistics along with
the factors from the Sept. 2007 Decision for spare margin percentage and
peaking factor, we compute the following peak-year locomotive requirements:

The parties agree that the locomotive operating expenses for
the revised LRR would remain as determined in the Sept. 2007 Decision except
for the fuel expense.In WFA’s revised
SAC presentation, most loaded LRR trains would undergo refueling at Orin Yard -
41.6 miles
from the Guernsey Yard where it previously had specified the LRR refueling would
be performed.BNSF argues that WFA did
not include the added costs that would be associated with transporting the fuel
from Guernsey to Orin.[56]BNSF proposes a transportation additive to
account for the change in refueling location.[57]

BNSF’s argument for a transportation additive appears to be
based on the erroneous assumption that in the Sept. 2007 Decision the
Board had used the actual cost of fuel at Guernsey Yard.[58]Although we referred to it as a “site
specific” cost, what we actually used was the weighted average of the fuel
costs at seven BNSF fueling locations, including Guernsey, that BNSF had
submitted in its June 15, 2006 Reply to the First Compliance Order.[59]Thus, the adjustment BNSF now proposes would
add a transportation additive to a weighted average expense.BNSF has failed to show that the cost of
transporting the fuel from Guernsey to Orin is
so expensive as to warrant such a modification to an average figure.Therefore, we will continue to use the fuel
cost in the Sept. 2007 Decision.

BNSF also asserts that WFA has understated the cost of
fueling by truck at Orin Yard because WFA failed to include costs for Direct to
Locomotive (DTL) fueling (fueling locomotives by tanker trucks) for certain
loaded trains traveling between Orin Yard and Northport. BNSF argues that WFA
assumed that the locomotive servicing cost derived from the R-1 Annual Report
data included the cost for DTL fueling.[60]On rebuttal, WFA stated that it accepts
additives to fueling costs where trucks would be used but that all loaded
trains that would require fueling at Orin would be directed to one of the two
tracks that would have fixed fueling facilities.[61]To correct this error in the RTC model, the
RTC model was modified so that all loaded trains moving to Northport for
interchange with BNSF would be serviced in Orin Yard on tracks with fixed
fueling equipment.[62]WFA’s modifications eliminate the need to
include DTL fueling costs to the movements at issue.

Both BNSF and WFA acknowledge that the number of railcars that
would be needed by the LRR to handle its peak-year traffic is largely a
function of the cycle times produced by the RTC simulation.[63]WFA’s revised RTC simulation produced slightly
different transit times than BNSF’s, and thus, a smaller increase in the LRR’s
railcar requirements.[64]WFA’s peak-year railcar requirements
increased from 557 on opening[65]
to 572 on rebuttal.[66]Because we use WFA’s operating plan, and the
number of railcars is a determinant of the operating plan, we use WFA’s railcar
requirements.

The LRR would utilize a mixture of LRR-provided cars,
foreign cars and private cars.BNSF
accepts WFA’s methodology for calculating freight car maintenance.[67]The difference between the parties with
respect to railcar lease and maintenance expenses is due to the difference in the
number of railcars they assert that the revised LRR would need.Because we use WFA’s railcar requirements, we
use its railcar lease and maintenance expense figures.

The operating plan is the prime determinant for what would
be an adequate number of train and engine (T&E) personnel.Because WFA’s operating plan is used here,
our SAC analysis is generally based on the number of crew personnel specified
by WFA.Both parties use the Sept. 2007
Decision methodology to determine the number of crew, re-crewing, and
rescue crews that would be required.

There is no difference in the parties’ final estimation of
the number of T&E personnel that would be required for normal operations by
the revised LRR.[68]BNSF argued for 14 additional T&E
personnel, primarily due to crewing and re-crewing needs at Orin Yard for the Campbell
Subdivision traffic.[69]In its Rebuttal, WFA accepted that number of
extra T&E personnel, along with some revisions to its Third Supplemental Opening
RTC model simulation.[70]We use the agreed-upon figures.

WFA reduced the number of non-train crew personnel from what
was in the Sept. 2007 Decision because of the smaller traffic group
and the reduced volume of traffic that the revised LRR would handle.[71]BNSF accepted WFA’s calculations concerning
non-train operating personnel, except with respect to equipment inspectors and
crew callers.[72]

WFA’s opening evidence included 40 positions for equipment
inspectors.On rebuttal, WFA agreed with
BNSF that it had not provided sufficient employees for the intended continuous
round-the-clock (24/7) coverage by the two-person roving inspection crew, thus
increasing the total Equipment Inspector employee count from 40 to 42.[73]

WFA states that it reduced the number of non-train operating
personnel to 4 from the 6 used in the Sept. 2007 Decision because of the
revised LRR’s smaller traffic group and reduced volume of traffic.[74]BNSF states that standard industry practices
for positions that must be staffed 24/7 dictate at least 4.2 persons per
position, and that that figure does not allow for missed time due to vacations,
illness, training, or other factors.BNSF argues that WFA’s operating plan provides for an insufficient
number of crew callers to fill these positions 24/7, and BNSF therefore would
add 2 crew callers to the operating plan, for a total of 6 crew callers.[75]On rebuttal, WFA added 1 additional crew
caller for a total of 5 crew callers.[76]Even though we used WFA’s Operating Plan,
BNSF’s number of Crew Callers is more reflective of actual railroad
operations.Because the Crew Caller
position is required on a 24/7 basis, we agree with BNSF that WFA has not allowed
for missed time due to vacations, illness, training or other factors.Thus, we use 6 crew callers, consistent with
the Sept. 2007 Decision.

The parties agree that the LRR would incur costs to recruit
and to train other employees.Consistent
with Board precedent, we include recruitment and training costs here as an operating
expense.BNSF accepts WFA’s training and
recruiting costs, except for the number of personnel.[80]BNSF would include an additional
crew caller and additional maintenance-of-way personnel.[81]We will apply the methodology and salary
figures agreed to by the parties to the number of employees determined by the
Board.This includes the start-up costs
for two track lubricators not accounted for by either BNSF or WFA.

BNSF accepts WFA’s methodology for calculating loss and
damage expenses but argues that WFA’s calculations use incorrect net ton
figures.[83]WFA contends that BNSF’s calculations used
the number of net tons the LRR would handle in calendar year 2006, not the
number of net tons that it would handle in the base year.WFA further notes that BNSF did not actually
use the number shown in its text of its narrative to calculate loss and damage
expenses. Rather, it uses a number that
was determined by multiplying the 2005 net tons by a hard-coded number that is
not sourced or explained.[84]

We use WFA’s calculation of loss and damage, including its
net tons figure.BNSF has not adequately
explained its departure from the procedure used by the Board in the Sept. 2007
Decision.

The parties generally agree on maintenance-of-way (MOW)
expenses consistent with the Sept.
2007 Decision, with the exception of certain changes to personnel
and equipment costs.We discuss the staffing and equipment
issues below.

The parties agree on MOW staffing with the exception of
field personnel.On opening, WFA reduced
the number of field MOW personnel from the 97 used in the Sept. 2007
Decision to 92.BNSF, in its reply,
argued that 108 field personnel would be necessary.[85]On rebuttal, WFA increased the
number of field workers to 102.[86]The 6 additional positions
that BNSF would include that WFA has not agreed to consist of 3 additional
positions in the track department, 2 positions in the communications
department, and 1 additional position in the field purchasing department.

Although BNSF argues for the inclusion of 3 additional track
maintenance personnel (a track
inspector, a welding crew member, and a machine operator/truck driver),
nowhere in its narrative has BNSF provided a reason that not having these
additional field personnel would hinder or jeopardize the operation of the
revised LRR.Thus, BNSF has failed to
support its inclusion of these 3 additional employees.

BNSF would include an additional communications foreman, but
it has not explained the need for both a communication supervisor in the
signals department and a foreman in the communications department.WFA has shown that there would be adequate
supervision of the communications maintainers and that there would be no reason
to add the foreman position. WFA also explained that only one radio shop
technician would be needed, due to the revised LRR’s reduced traffic volume and
the corresponding reduced total number of locomotives that would be required
for the peak traffic period.We agree
with WFA that one radio shop technician would be sufficient.

BNSF argues that WFA reduced the purchasing/materials
management department by 2 positions.However, WFA combined the crane operator/truck driver positions and, on
rebuttal, moved the purchasing manager to the field office.There is no evidence that 2 positions in the
purchasing department are not adequate to handle the purchasing function and
materials management.

For these reasons, we use WFA's field personnel count of 102
and its overall MOW personnel count of 116.

Because we do not use BNSF’s proposed MOW field personnel
count, there is no need for the additional equipment BNSF identified in its
reply statement.The equipment
identified in the WFA spreadsheet is the same as the quantities used in the Sept. 2007 Decision.[87]Although WFA’s revised presentation
includes five more field personnel than the Sept. 2007 Decision, we agree with
WFA that the additional equipment identified by BNSF is not needed.That is because the Sept. 2007 Decision included
equipment for seven sets of track crew, which would be sufficient to provide
for the six sets of track crew in WFA’s presentation.

The parties agree that some maintenance would be handled by
contractors, rather than by the LRR’s MOW staff.On reply, BNSF made some changes and
recalculations to WFA’s proposed costs.WFA accepted BNSF's MOW contract costs.[88]These revisions are discussed below.

WFA agrees that the cost of brush
cutting and mowing would increase above the level in the Sept. 2007 Decision due to the increased route miles of
the revised LRR.However, WFA slightly
understated the cost
for this item, because it did not update the miles in its opening workpaper.[89]

BNSF pointed out in its reply that WFA did not update this
item to incorporate the increased communications cost on the reconfigured
LRR.BNSF corrected this by calculating
2% of the total communications cost as calculated in WFA’s TS Opening
spreadsheet, which would increase the MOW cost for this item by $57,729.[90]On rebuttal WFA accepted this cost.We will use the recalculated maintenance
cost.

In the technical corrections listed in the Feb. 2008
Decision,[91] we
noted that, although we had used BNSF’s MOW equipment costs, which included
maintenance of equipment, in our summary of MOW costs, we also added WFA’s
separate maintenance component, resulting in a double count of the equipment
maintenance cost.In its TSO
spreadsheet, WFA did not make the correction. BNSF therefore removed the
$258,119 for equipment maintenance.[92]WFA does not dispute this change, and
therefore we remove the equipment maintenance cost from the contract costs.

Although not discussed in their narratives, the parties disagree
on the bridge and culvert inspection costs.In its opening, WFA used a 16-day inspection period while BNSF, on
reply, used a 43-day inspection period.[93]On rebuttal, WFA agreed to accept BNSF's
contract work costs, but failed to update this item in its rebuttal
spreadsheet.We regard this omission as
an oversight, and in view of WFA’s stated agreement, we use BNSF’s 43-day
inspection period.

In its
opening spreadsheet, WFA subtracted the cost of the fueling facilities before
applying the 0.5% additive.[94]In its reply, BNSF recalculated the cost of
building maintenance to apply the 0.5% additive without exception.[95]We apply this figure to our restated building
maintenance costs.

This appendix addresses the evidence and arguments of the
parties concerning what it would cost to build the LRR.Table
C-1 summarizes the parties’ cost estimates associated with that
construction, as well as the numbers used in our analysis.

The only dispute between the parties regarding acreage is
the amount of land that would be needed for the LRR’s yard.BNSF would increase the Orin Yard acreage by 5.75 acres to account
for the land needed to accommodate the buildings, including the site land
quantity (a 50-foot buffer from the outermost track to the yard buildings), the
building footprint quantity and an access road for vehicular traffic adjacent
to the car shops.[97]The site land quantity is outside the
building footprint and used in conjunction with the building; it would be
comprised of parking lots, areas for electric and mechanical machinery used by
the building, drainage ditches, trash bins, etc.

WFA included a 50-foot
buffer around its outermost track within its original acreage to account for
site land.When WFA initially determined
the land to accommodate the buildings, it counted all of the site land but
failed to count the land under the buildings themselves, i.e. their footprints.
On rebuttal, WFA agreed that its opening
evidence had not accounted for the land needed to accommodate the buildings,
and included an additional 4.15
acres to accommodate buildings.[98]Because WFA included a 50-foot buffer to
account for site land, we find no reason to add another buffer.Using WFA’s evidence, the footprint and the
site land equal 4.61 additional acres, the same amount of acreage that BNSF
would include to accommodate building sites.Therefore, we will add 4.61 acres to the Orin Yard site.

WFA included a gravel road from the locomotive shop to the
car shop around the outside of the yard, which is included in WFA’s land
determinations.[99]Therefore, the inclusion of additional land
around the car shop to accommodate vehicle traffic is not needed.

The parties agree on all aspects of the LRR’s roadbed
preparation costs except with respect to the use of culverts.BNSF objects to WFA’s use of culverts at
certain locations at the LRR’s Orin Yard.BNSF itself does not have a yard at Orin, but it does have a
single-track line in the area encompassed by the LRR’s Orin Yard with three
existing three-span bridges on the line.[100]WFA would have the LRR install 96-inch corrugate
metal pipe culverts (CMPs) rather than erect bridges.[101]

BNSF states that it is not uncommon to convert one-span
bridges of less than 20 feet to culverts, but objects to WFA’s
substituting culverts for bridge spans of 102 feet (BNSF’s bridge at
MP 125.39), 53 feet
(BNSF’s bridge at MP 124.75), and 82 feet (BNSF’s bridge at MP 124.43).[102]BNSF argues that its bridges cross
“drainage,” and not “ditches” as WFA asserts,[103]
although, BNSF acknowledges that its discovery documents stated the bridges
crossed “ditches.”[104]BNSF argues that a complete hydrologic and
hydraulic analysis would need to be performed to determine if a conversion to
CMP was feasible.[105]As to the bridge at MP 124.43, BNSF argues in
its motion to strike that the width of the flow at that point is too wide for a
culvert. As for the other two locations,
BNSF states that it is currently double tracking the main line through the area
of the proposed LRR’s Orin Yard and did not replace the bridges with 96-inch
CMPs, but constructed the same overall length bridges and span lengths that
exist on the main line[106]

WFA acknowledges that there might be drainage in the
ditches, but it claims that BNSF’s engineer incorrectly assumed that the
drainage required exceeds what a 96-inch culvert could accommodate.[107]WFA states that BNSF incorrectly marked two
drainage areas as those leading to two replaced bridges at issue here - at
MP 125.39 and MP 124.75 - when actually the drainage areas lead to an 84-inch
culvert at MP 125.39 and a double 72-inch culvert at MP 124.75.[108]These two drainage areas cover 254 acres and 196 acres, respectively.[109]WFA states that drainage areas for the bridges
at MP 125.39 and MP 124.75 are 158 acres and 136 acres, respectively.[110]Thus, WFA argues, the drainage areas leading
to BNSF’s bridges at issue here are smaller than those leading to BNSF’s
existing culverts, and WFA is proposing to have the LRR use culverts that would
be larger than BNSF’s existing culverts to handle drainage.[111]As to the culvert that would be substituted
for the third BNSF bridge, WFA notes that its proposed culvert at MP 124.43 would
handle a drainage area of 288
acres.[112]

We agree with WFA’s position that it would be reasonable to
use culverts instead of bridges at these three locations.WFA has sufficiently explained that the drainage
under those bridges would not exceed the maximum capacity of a 96-inch culvert
and that the culverts currently under these bridges are smaller in diameter
than those proposed by WFA.We also
accept WFA’s explanation that the culvert that would substitute for the bridge
at MP 124.43 has similar drainage characteristics to an existing nearby box
culvert, thus there would be no reason not to use a 96-inch culvert here.Moreover, WFA’s culvert locations would be designed
to channel and control the water through the use of rip-rap at the out-fall.

BNSF would also add vehicular access to the east end of the
Orin Yard by means of a 508-linear foot 14’x14’ box culvert at MP 124.66,
traversing under 14 yard
tracks and replacing a private at-grade crossing.[113]WFA accepts these modifications.[114]WFA argues that a series of bridges would not
be necessary for yard vehicles, such as inspection vehicles and DTL fueling
trucks because WFA included additional space between the tracks for these types
of vehicles in the total required culvert length.[115]We find that culverts are a reasonable choice
to use for the yard vehicles to cross the new yard, and we use WFA’s evidence.

BNSF would add a two-track railroad bridge and a two-lane
road under the bridge at MP 126.29 to provide access to the locomotive shop
area.[116]

The parties agree on the unit costs applicable to all of the
various signals and communication items, which the exception of handheld radios
required by the LRR MOW employees.[119]BNSF would increase the number of handheld
radios by 4.[120]We use WFA’s radio count because we use WFA’s
staffing levels for MOW staff.WFA’s
radio count reflects the LRR’s staffing levels that were approved in the Sept.
2007 Decision.

Due to the
LRR’s configuration change, WFA modified the quantities of certain facilities,
while relying on the unit costs used by the Board in the Sept. 2007 Decision.The major system facilities were moved from Guernsey to Orin.These facilities include:the
LRR’s headquarters building, the primary crew facilities, a locomotive repair
shop, fueling facilities, and a track maintenance base and MOW equipment
storage track.

WFA moved
the LRR headquarters from Guernsey Yard to Orin Yard.Other than changing its location, WFA did not
alter the headquarters building in any way because the general and
administrative staffing of the LRR has not been modified.Thus, WFA continued to use the approved cost
of $2,659,352 for the LRR’s headquarters building.[121]Accordingly, we continue to use this cost for
the headquarters building.

In
accordance with the LRR’s changed configuration, WFA relocated the fueling
facilities (including storage tanks and other appurtenances) from the Guernsey
Yard to Orin Yard.WFA proposes the same
two fueling facilities as those approved in the Sept. 2007 Decision.WFA’s main line fueling facility would act as
an “express fueling station for eastbound (loaded) coal trains, intended to top
off only fuel, lube oil, and radiator water.”[122]The fueling facility inside Orin Yard would
perform a greater variety of locomotive maintenance services (the LRR would
also utilize some direct-to-locomotive (DTL) fueling).WFA continued to use the approved facility
cost of $12,842,819 for the revised LRR.[123]BNSF does not challenge the design of
the fueling facilities, nor the cost.Therefore, we will continue to use the fueling facilities cost approved
in the Sept. 2007 Decision.

In its reply, BNSF proposes to add two public access roads
to Orin Yard.[124]On the west end, BNSF designed a roadway to
access the locomotive shop, fueling tracks, and fueling platform.To provide access from Highway 18, BNSF
upgraded Route 319 to an 860-foot two-lane roadway and provided a grade
separation with a bridge under the two mainline tracks.On the east end, BNSF proposes construction
of a 3,250-foot access road just west of the car shop at MP 124.66, with a
102-foot bridge over Shawnee Creek and a 508-foot box culvert at MP 124.66 that
would go under 14 track and replace a private crossing.On rebuttal, WFA asserts that there would be no need for two separate
access roads to Orin Yard.[125]WFA accepts the proposal of a grade-access
road on the west end, but argues that construction of the second road would be
unnecessary.

Upon reviewing the map of Orin Yard,
we conclude that WFA's proposed placement of an additional access road at the
west end of the Yard would provide sufficient access to the buildings located
along the north portion of the yard.Therefore, we do not accept the access road located at the east portion
of the yard proposed by BNSF.

WFA provided for a gravel roadway for vehicular access
between the area of the locomotive shop and the car shop.[126]This road would enable vehicles to
access the car shop area from the access road at the west end of the yard.Its construction would not require any
additional land to be acquired, because WFA included a buffer around the
outside of the yard that allows room to place a gravel road.We accept WFA’s proposal and the associated
yard site costs.

WFA proposed the same basic design and costs for the LRR’s revised
locomotive shop that was accepted in the Sept. 2007 Decision.[127]In addition to the change in location, WFA
made several modifications to account for the reduction in the LRR’s
peak-period locomotive count.WFA
determined that the revised LRR would require 38 fewer road locomotives than
the original LRR.Accordingly, WFA reduced
the capacity of the locomotive shop by one track to reflect the reduced
locomotive maintenance that would be needed.BNSF does not challenge
the modifications to the locomotive shop at Orin Yard.Therefore, we use WFA’s design and cost for
the locomotive shop.

In the Sept.
2007 Decision the
Board approved of the parties’ agreement that the LRR does not need a car
maintenance facility.[128]Therefore, WFA did not provide one for the
revised LRR.However, WFA, as in its
earlier evidentiary submissions, provided the necessary space and tracks for
such a facility in the Orin Yard.

WFA proposed two crew change facilities (a large facility at
Orin and a smaller facility at Northport), six roadway maintenance buildings,
and one yard office.WFA used the costs
approved in the Sept. 2007
Decision and
adjusted the quantities to reflect the changes in the revised LRR.

WFA states that the revised LRR would use the same 30,000
gallon-per-day wastewater treatment plant that the Board accepted for the
Guernsey Yard in the Sept. 2007 Decision.Due to the configuration change, the wastewater
treatment facility would be located at Orin Yard.WFA continues to use the Board-approved costs
for this facility.

The parties also agree that a 400 gallon-per-day wastewater
treatment plant should be placed at each MOW facility.The revised LRR would have six roadway
maintenance buildings, including one at Orin that would be served by the 30,000
gallon-per-day facility located at Orin Yard.WFA included five 400 gallon-per-day wastewater treatment plants, using
the Sept. 2007 Decision costs for these facilities.

The parties agree on public improvement costs, with the
exception of at-grade crossings costs for crossings that would require
inspection vehicle access.In its
opening, WFA omitted crossing materials at the ends of the Orin Yard tracks,
which would be needed for inspection vehicle access to the different inspection
roads running parallel to and between the yard tracks.[129]BNSF added these materials[130]
but, according to WFA, understated the required number of crossings as eight
because it assumed there would be four access roads.According to WFA, there would be six access
roads, so 12 crossings would be required - one at each end of the yard.[131]WFA also added five crossings to accommodate
the gravel road running from the locomotive shop to the car shop.[132]Because we use WFA’s configuration, we use
its investment costs for the at-grade crossings that would require inspection
vehicle access.

Mobilization involves the marshalling and movement of
people, equipment, and supplies to the various construction sites and other
pre-construction coordination and activities.The parties agree upon a 3.5% mobilization cost, covering initial mobilization,
demobilization, and performance bonds, and they agree that this factor should
not be applied where mobilization costs are already accounted for in the
contractors’ bid.[133]

The parties agree to use the Board-approved 10% additive for
contingencies, excluding land costs.[135]

[1]Cross-over
traffic refers to movements for which the SARR would replicate only a portion
of the defendant railroad’s service; the SARR would interchange the traffic
with the defendant to handle the remainder.

[7]The evidence
submitted by BNSF is not “new evidence.”New evidence is not evidence newly submitted, but evidence that could
not have reasonably been presented to the agency during the rulemaking
proceeding.All of the arguments raised
by BNSF could and should have been raised in the rulemaking, particularly because
this case was already pending and BNSF was forewarned that the agency intended
to apply the proposed rules to this case.As such, we find BNSF’s challenge to be one based on alleged material
error, rather than seeking change based on new evidence.

[16]BNSF has
relied on the wrong test from TMPA.In that case, the Board was presented with two different kinds of
rerouted traffic:(1) internal rerouted
cross-over traffic (the Big Brown movement) and (2) rerouted cross-over traffic
where the complainant also proposed to reroute the off-SARR portion of the
movement through the congested Houston
area (the three other movements discussed in TMPA).The tests for whether a complainant can
include these kinds of traffic in the traffic group are very different.A complaint may include internally rerouted
traffic so long as the operating plan meets the shipper’s needs—the same test we apply for all traffic in the SAC
analysis, rerouted or not.The Board
created a more stringent test for the second kind of rerouted traffic because
the SAC analysis does not account for all off-SARR operating and capacity costs
that might flow from such rerouted traffic.SeeTPMA at 595; seealsoDuke/NS at
25-26 (shifting the burden of persuasion to the carrier if the proposed reroute
would reduce the total distance of the movement).Here, BNSF argues that WFA has not satisfied
this more stringent test.See
BNSF TS Reply Nar. at I-13-14.But as
WFA correctly observed, this is the wrong legal standard, as WFA has not
included any traffic with off-SARR reroutes.

[49]As the
Morningstar cost-of-equity estimates were not submitted by either party in this
proceeding, we are taking official notice of these publicly available cost-of-equity
estimates for the railroad industry. The
figures supporting this chart will be made available to the parties upon
request.“3-Factor F-F” denotes the
estimate published by Ibbotson/Morningstar using a 3-Factor Fama-French approach.“1-Stage DCF” and “3‑Stage DCF” refer
to the Ibbotson/Morningstar cost-of-equity estimates for the railroad industry
using a single-stage and multi-stage DCF model.

[50]SeeMajor
Issues at 14 n.19.One of the key
changes in Major Issues was to resolve a long-standing dispute between
carriers and shippers over the productivity of the SARR and the increase of
SARR operating expenses over time.Carriers asserted that the SARR would be unable to generate the same productivity
gains over the DCF period as predicted for the railroad industry, while
shippers asserted that the SARR would.In
Major Issues, we adopted a position between these two perspectives.In our view, the SARR would become more
productive over time (thanks to the introduction of new technologies and techniques),
but because it is designed to be optimally efficient from the moment it begins
operation, the ability to generate additional productivity gains would be constrained.We chose to use a hybrid approach which
transitioned over a 20-year period from zero productivity growth (using the
RCAF-U index) to the full predicted productivity growth of the railroad
industry (using the RCAF-A index).